Massey Positioning for Increased Production

March 28th, 2011 by Trefis Team
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Trefis
MEE: Massey Energy logo
MEE
Massey Energy

Massey Energy (NYSE:MEE) has received a permit from the United States Army Corps of Engineers to begin operating in West Virginia. Thorugh this permit, a subsidiary of the company will begin operating the Reylas Surface Mine in Logan County, expecting to produce around 1 million tonnes of coal per year over the next 6 years. [1] Massey is the 4th largest coal company in the United States based on produced coal revenue; competitors include Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI) and CONSOL (NYSE:CNX) Energy.

We estimate that the produced coal division constitutes around 84% of our $55 price estimate for Massey’s stock, which stands about 20% below market price.

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Massey Positioning for Increased Production

We believe that selling coal to utility customers provides the most value to Massey. The total amount of coal sold to utility customers saw a slight decline between 2006 and 2009, averaging near 27 million tons as Massey maintained its production levels to support strong global demand. The total amount of coal sold to utility customers was not significantly impacted during the economic downturn as utility coal is used in power plants for generating electricity, the demand for which is largely inelastic.

In 2010, Massey saw an uptick in coal sales to utility customers, a trend that we expect to persist through our forecast period. We forecast that this number will increase from about 27 million tons in 2010 to nearly 30 million tons by the end of our forecast period.

However, with Massey exploring new areas and looking for new permits, there could be upside to our base forecast. To illustrate the sensitivity of the company’s stock value to this metric, we estimate that a slight uptick from our base case, towards 32.5 million by the end of our forecast period, would imply 5% upside to our $55 price estimate for Massey’s stock. Notably, this scenario would still leave our price estimate below market price.

You can test this scenario, and others, by dragging the trend line in the interactive chart above.

See our full analysis and $55 price estimate for Massey Energy stock

Notes:
  1. Massey Energy unit gets permit to open new coal mine in West Virginia [↩]